India’s central bank on Wednesday cut its key interest rate for the fourth consecutive time, reducing the repo rate by 0.35% to 5.40% to shore up the economy, with consumer spending and corporate investment faltering and the production of capital goods and consumer durables decelerating.
In a bimonthly review of the economy, the bank trimmed the GDP growth forecast for the current fiscal year to 6.9% from 7%. India’s fiscal year runs from April to March.
The benchmark interest rate is what the Reserve Bank of India charges on lending to commercial banks.
The bank maintained an accommodative stance for monetary policy, implying that an increase in interest rates is off the table.
Lower interest rates help make credit cheaper for borrowers, though they can also spur inflation. Retail inflation edged up to 3.2% in June from 3% in April-May, driven by food inflation, a bank statement said.
“Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate,” the statement said.
The bank reduced the key interest rate for the fourth time in a row. On each of the three previous occasions, it reduced the repo rate by .25%.
Bank Governor Shaktikanta Das told reporters that a 25-basis point reduction was inadequate while a 50-basis point cut was excessive, so the bank’s monitoring committee took a balanced call.
But it was a split decision. Four members of the bank’s monetary policy committee voted to reduce the interest rate by 0.35%, while two members voted to reduce it by 0.25%.
Housing sector representatives welcomed the federal bank’s decision, but complained that a majority of commercial banks have not been passing on the recent cuts to borrowers.
“As a result, lending rates continue to remain high. The slowdown in economy coupled with high lending rate has accentuated the slump in housing demand,” said Mohit Goel, CEO of Omaxe Ltd.
Rather than making sure that consumers are offered reduced interest rates on home loans, there was still an ongoing tendency of cushioning the bottom lines by the banks, which ultimately turns out to be counterproductive to the move itself, said Amit Modi, director of ABA Corp.
The bank statement also said that economic activity remained weak in major emerging market economies — including China, India, Brazil and South Africa — pulled down mainly by slowing external demand.